Turning around Pharmaceutical Manufacturing in the US

Pharmaceutical manufacturing in the United States is in rapid decline. To devise a strategy for reversing it, we need to understand the current landscape and develop a coherent plan for re-energizing technological innovation, while making domestic manufacturing economically viable.

The industry is undergoing wrenching changes. Higher regulatory standards for efficacy and safety, among other reasons, have led to a significant level of difficulty in replacing "blockbusters" developed in the 1980s and 1990s that are now coming off patent. The rapid growth in biological understanding remains a source for current and future drugs, but has also raised the bar on selectivity and toxicology expectations. In the past 10 years, new molecular entities (NMEs) entering the market number less than half of those in the preceding decade. This decrease has caused significant reductions in revenue for the industry, forcing reductions in workforce, a focus on productivity and cost-containment, and a search for new business models.

Industry is also grappling with issues of quality and compliance in manufacturing. Some key contributing factors are the regulated environment, which has pushed to lock inefficient and poorly understood manufacturing processes too early, the lack of modern process controls, and, ironically, the historic high gross margins of the industry, which until recently often made manufacturing cost a minor component undeserving of serious attention.

New business models

This article focuses on two new key business models being adopted by the industry. First, the emerging distributed model for innovation, where large companies rely for much of the science and execution of research on a network of companies of diverse sizes, sometimes supported by academic laboratories, each one excelling in a given niche (e.g., discovery, clinical testing, product development, regulatory approval). This transition away from the traditional vertically integrated development model has brought a new set of challenges with it, including a reluctance of both large pharmaceutical companies and venture capital firms to fund new drugs and drug-delivery systems that have not yet achieved proof-of-concept (the so called "valley of death"), and the transactional cost associated with operating in this "pharmaceutical ecosystem."

A second strategy is the increased outsourcing of primary and secondary manufacturing, packaging, and distribution. CMOs have become a major part of this pharmaceutical ecosystem. The trend to outsource has brought a diverse group of CMOs into the picture, ranging from large, well-capitalized companies with a solid understanding of manufacturing, quality, and compliance, to small, inexperienced companies in emerging markets who struggle to understand, much less provide, high quality and compliance standards.

Furthermore, pharmaceutical sales in emerging markets are expected to grow from 10–40% in the next 20 years, providing most of the worldwide growth, thus driving pharmaceutical companies to invest and create a presence in those markets. Thus, shifting manufacturing to emerging markets is an effective way to achieve this goal, but the net result for the US economy is a massive loss of jobs.

There are also fundamental reasons why pharmaceutical manufacturing has lagged behind other high-tech industries. Every product is a different molecule, with different characteristics, method of manufacture, analytical methodology, stability characteristics, and so forth. Most pharmaceutical products involve powder processing, which is—at best—a partially understood field. As a result, for every product, the entire product-development process is developed from scratch.

In contrast, other large-scale manufacturing industries such as petrochemicals, automobile, and microelectronics, deal with a much smaller number of materials and use processes that are better understood. The products and manufacturing methods evolve and improve with time because one can build on what was done before.